Bait and Switch

05/01/2013 | Dr. Robert Peltier, PE

The Boxer-Sanders “Climate Protection Act” and its sister bill, the “Sustainable Energy Act” are the latest, and perhaps the most onerous, in a series of legislative proposals that seek to tap the immense revenue stream promised by taxing carbon.

Sen. Barbara Boxer (D-Calif.), chair of the Environment and Public Works Committee, recently signed on as a co-sponsor of Sen. Bernie Sanders’ (I-Vt.) “fee and dividend” carbon tax legislative proposal. The law would impose a “fee” on carbon emissions at their source and rebate a “dividend” to “legal residents of the U.S.” for a portion of the cost impact of the tax, along with other incentives. The legislation carefully substitutes the more benign “fee” in place of the more pejorative “tax,” which it is. The government will also slice off a healthy portion of the carbon tax revenue for its own use.

The legislative proposals enable collection of the tax beginning at $20 per ton of carbon or methane equivalent emissions, rising at a rate of 5.6% a year for 10 years (effectively a 72.4% compounded increase). The tax would be extracted at the point of sale as well as from fossil fuel importers. Sanders estimates his carbon tax plan would generate about $1.2 trillion in new government revenue over the first 10 years covered by the legislation, although the legislation is written with a much longer effective period in mind, through 2050.

The legislation also directs the government how to spend its newly collected bounty. A portion of the proceeds will be used for infrastructure improvements, about 60% would be distributed to residents in the form of rebates and other efficiency projects, and the balance, about 25% of the revenue, will go to the federal government for deficit reduction, which is a meaningless gesture unless matching expenditures are simultaneously curbed. The scheme has a little something for almost everyone, no doubt intended to attract the necessary votes for passage.

The Rest of the Story

The sales pitch obviously self-identifies as the old bait-and-switch scheme. The “bait” for legislators is each gets to “bring home the bacon” in the form of rebate checks to voters and huge new tax revenues for the federal government. For carbon control proponents, the bait is found in the Sanders/Boxer Climate Legislation summary: “setting a long-term emission reduction goal of 80 percent or more by 2050 as science calls for.” For the rest of us, we are being asked to defer to the “experts” and believe that anthropogenic emissions cause an increase in global average ambient temperatures, an assumption that current facts don’t support (see “Where’s the Warming?” February 2013). This statement is a standard rhetorical device known as an argument from authority, certainly not the foundation upon which to build a multi-trillion-dollar tax structure.

The “switch” part of the scheme comes in two parts. The first part is found in the body of the legislation. Sanders’ response to the “crisis facing our planet [that] is much more serious than they [scientists] had previously believed” is to propose baby steps for the first 10 years, when huge leaps in emissions reductions are required, if you believe the rationale for the legislation. Yet, over the first 10 years the proposed carbon tax will have no discernible impact on global average temperatures, ostensibly the basis of the legislation.

The second part of the switch is what happens in the out years. Assuming emissions decrease by 20% during the first decade, the tax rate will necessarily skyrocket to achieve the overall goal of 80% reduction by 2050. Physics reminds us that the difficulty and cost of the last 20% will be exponentially higher than the relatively easy first 20% reduction. After a decade, the carbon tax will metastasize throughout the economy and the government will be addicted to the cash.

NERA Economic Consulting has also studied the potential effects of a carbon tax based on a more conservation 4% annual increase of the introductory $20/ton carbon tax rate plus a projection of the large increase in the carbon tax rate necessary to achieve the 80% reduction by 2050 goal and prepared its analysis in the report “Economic Outcomes of a U.S. Carbon Tax.” NERA concludes that a “carbon tax would have a devastating impact” on the economy due to higher prices for natural gas and electricity and other energy commodities causing “output in energy intensive industries [to] drop by as much as 15 percent and 7.7 percent in non-energy intensive sections,” according to National Association of Manufacturers Vice President Ross Eisenberg, quoting report findings. For example, the report predicts the price of gasoline will be $14.57 per gallon in 2053, with $9.06 in tax, compared to $5.51 per gallon with no carbon tax baseline. NERA concluded that a carbon tax under an “80% reduction tax case” would cost the economy up to 20 million jobs by 2053 and would reduce wages about 7% and wage growth over 8% due to increased cost of energy.

Practice Patience

The most current Environmental Protection Agency data shows that U.S. greenhouse gas (GHG) emissions were 11.8% less in 2012 than in 2005 (the proposed baseline year). The trend in emissions reductions already has a negative slope without a carbon tax. In fact, fuel switching from coal to gas will surely further depress GHG emissions in the coming years.

A sense of urgency is noticeably absent in this legislation. I also counsel patience. Allow the economy to recover and encourage its continuing transition to domestic oil and gas production, and we’ll watch the carbon emissions continue to decline. A soft landing is always preferable to a crash and burn.

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